Several weeks of heavy selling mean that high-quality dividend-paying stocks offer their highest yields in some time. These compelling value opportunities only appear when investors panic and allow fear to override reason.
But taking advantage of these opportunities is easier said than done. Even savvy investors feel the urge to pull out as their gains evaporate with each passing day. Those with less experience, knowledge or courage of conviction will give in to their emotions, cashing out of their holdings and turning paper losses into real ones.
The daunting headwinds of new exhibiting economic weakness have given the weak-hearted ample excuses to throw in the towel and abandon even high-quality names that already demonstrated the ability to meet their dividend obligations during the worst financial crisis in a generation. But these investors forget one simple fact: The strong always survive. If you focus on stockpiling shares of healthy businesses that have the wherewithal to pay their dividends, you’ll eventually recover whatever losses the fear-drenched market inflicts on your portfolio, and then some.
If you gather enough courage to buy high-quality names during this pullback, you can lock in high yields and set the stage for extraordinary returns. Here’s an overview of three income ideas for the market pullback.
MLPs: No New Taxes
High-quality master limited partnerships (MLPs) haven’t shown any sign that the weak economy has affected their businesses. My favorite names continue to expand their operations, taking advantage of the low cost of capital and rising demand for energy infrastructure in the nation’s red-hot shale oil and gas plays.
For example, Enterprise Products Partners (NYSE:EPD) posted its best-ever results in the second quarter and boosted its distribution for the 29th consecutive three-month period, while Genesis Energy (NYSE:GEL) and Spectra Energy Partners (NYSE:SEP) have upped their payouts by more than 10 percent from year-ago levels.
Speculation that the government might change the tax-advantaged status of energy-focused MLPs to raise revenue shouldn't deter you from buying the strong companies; such an outcome is unlikely. For more on MLPs and taxes, see my colleague Elliott Gue’s InvestingDaily.com article, Master Limited Partnerships and Taxation.
Despite being one of the top MLP Indices, The Alerian MLP Index, which comprises the 50 largest energy-related MLPs, has a market capitalization that’s less than half of ExxonMobil Corp’s (NYSE:XOM) market cap.
Collecting corporate taxes from these MLPs wouldn’t generate significant amounts of revenue for the government. However, such a move would hurt the Obama administration’s efforts to promote the use of natural gas at power plants and as a transportation fuel.
In short, these MLPs’ businesses and growth prospects haven’t changed. Regard any correction in the broader market as an opportunity to buy your favorite names.
The Ultimate Insurance
During the 2008-09 bear market and recession, only three of more than 120 regulated US water, gas and electric utilities cut their dividends. Today, utilities face even less business risk.
A record-low cost of capital has enabled even junk-rated companies to slash interest costs dramatically, eliminate near-term refinancing needs and fund more low-risk development. This favorable borrowing environment persists despite the prevailing uncertainty.
As for operating risk, companies continue to recession-proof their businesses by focusing on approved investments in their regulated operations. Reliable cash flows and conservative payout ratios translate into bulletproof dividends that should remain intact regardless of what happens in the economy.
Higher Risk, Higher Rewards
Commodity prices have declined in recent weeks amid concerns that economic weakness will weigh on demand. Nevertheless, oil prices remain elevated relative to year-ago levels and fears of a US recession appear overblown.
If you’re a patient investor who’s willing to put up with a bit of volatility and risk for a bigger reward, these trends could prove profitable drivers of growth for your portfolio in the near-term.
As I told readers in Dividend Investing: Top Six Takeaways After a Volatile Week, stocks of solid, dividend paying companies always recover lost ground--as long as they stay strong. The important thing is always how your companies are doing and how well they’re supporting dividends. The rest is a sideshow, exciting but ultimately irrelevant to wealth building and garnering superior, safe current income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.